Daryl Collins, director of the Financial Diaries project sponsored by FinMark Trust, the Ford Foundation and the Micro Finance Regulatory Council, highlights the key messages of her focus note "Stocks and Flows - Quantifying the Savings Power of the Poor".
1- What is the Financial Diaries project?
In South Africa, the Financial Diaries research project is based at the University of Cape Town. I first became keen to do a Financial Diaries study in South Africa after hearing Stuart Rutherford speak about his Financial Diaries study in Bangladesh. With South Africa's tremendous change in social landscape, there is very little research on how the poor manage their money. Moreover, policymakers in South Africa had just started grappling with the question of how best to bring the country's rather sophisticated financial services industry to low income groups. It was the perfect time to provide input, fresh from the ground, about what types of mechanisms people already had to manage their money, before creating lots of intervention strategies.
The Financial Diaries project was conducted in three different areas of South Africa: Langa (our urban site); Diepsloot (our peri-urban site) and Lugangeni (our rural site). In all, we recruited a stratified sample of 180 households. Every other week from September 2003 to December 2004, we interviewed the households on every cash flow coming in and out. So at the end of the day, we have a very detailed database of income, expenditure and financial flows.
We released some of the initial findings in Johannesburg and Cape Town in May 2005. During the past year, I've continued to write short pieces on topical issues - medical spending, building up net worth, financial styles - and have sent them to a broad list of interested participants. All of these pieces can be found on www.financialdiaries.com. The database itself will be released to the public on May 3rd, and can be accessed through http://www.datafirst.uct.ac.za/data.html. Stuart Rutherford, Orlanda Ruthven and I, with some help from Jonathan Morduch and David Hulme with also be combining our insights in a book based on the Financial Diaries in South Africa, Bangladesh and India, which will hopefully be out early next year.
2- What have been the major findings of the project with respect to savings?
Much of what we've found has confirmed Stuart Rutherford's findings in Bangladesh and Orlanda Ruthven's findings in India, i.e. that the poor have very interesting and complex financial lives. Poor households have little money, but this does not mean that they do not manage what they have. We found that Financial Diaries households use, on average, 17 different financial instruments over the course of a year - usually about 4 savings instruments, 2 insurance instruments and 11 credit instruments.
One thing that is extremely important to keep in mind is that no household holds a portfolio of financial instruments that is entirely formal or entirely informal - they always have a mix of financial instruments. Even the better off, who have more sophisticated instruments, like employer-provided pension or provident funds or store credit cards, still belong to informal savings clubs and burial societies.
A key to successful savings is an effective commitment factor. A good example of this can be found in Sipho who lives in an urban shack settlement. In 2004, he opened a fixed deposit account with a monthly stop order to his bank account for R500 ($85). Sipho currently is paid roughly R2000 ($335) per month as a direct deposit into his bank account, so a good one-quarter of his earnings is automatically put into savings. By taking the decision of how much to deposit out of his hands, he was able to increase his savings by six times in only a year.
Informal savings clubs, such as ROSCAs or ASCAs, also work with a commitment factor because if you don't meet your payment obligations you are letting down the savings group. This is a common and effective way to accumulate cash flows, but it is unclear whether this short term accumulation of cash flow leads to a long term accumulation of wealth.
3- Could small monthly cash flows generate net worth for the poor in the short-run?
Net worth (physical assets plus financial assets less liabilities) is one way to determine the "financial well being" of a household in terms of both assets and liabilities. Surprisingly, we found that net worth can change significantly over a short period, reflecting a meaningful capacity to save. Taking a median across households, net worth increased between February and November 2004 (10 months) by 83% in Langa, 32% in Lugangeni and 92% in Diepsloot. Most of this change was, not unexpectedly, in financial assets, which would include savings in the house or bank, savings clubs, money guarding and giving credit and loans. Households clearly have the ability to turn small monthly cash flows into larger lumps of financial assets.
Is this increase in net worth sustained?
It is difficult to generalize this question across households, so to shed more light on the process, I'll use the example of one household who happen to be particularly good at managing their money. The case involves a young couple, Jonas and Mimimi, who are saving for Christmas and a rural home.
Jonas and Mimimi run a shebeen (township bar) in Langa. They have an impressive capacity to save. Mimimi's profits from the shebeen business are about R2000 ($335) per month, while Jonas works as a gardener and is paid R1200 ($200) per month. Mimimi typically manages to send home about R200 ($35) per month for either building their home in the rural areas or supporting their children living there. She then manages to stretch about the remaining R570 ($95) for their living expenses every month.
One of their most important savings instruments is the savings club. Together, they save about R2400 ($400) every month with savings clubs. They contribute about R2000 ($335) to a rotating savings club with 3-4 other people and get paid out about R4000-R5000 ($665-835) every several months. Mimimi also uses an accumulating savings club and a bank account to save money. Jonas is paid via direct deposit into the bank and they try to withdraw only R1000 ($165) of Jonas' salary from the bank, which would leave behind about R120 ($20) or more each month.
At the end of the day, this young couple built up about R25 000 ($4170) in these savings instruments. Of this savings, 12% was spent on Christmas, 6% was retained in the bank and 82% was used to build the rural house. Like other young couples in the Financial Diaries, most of their savings goes towards housing. This is not unusual for poor and non-poor households all over the world. However, this may not be best investment decision for those living in townships and rural areas. Although substantial value exists in township and rural properties, there is an absence of a secondary market in these areas in South Africa, which means that these housing investments are being made in a highly illiquid and inadequately priced asset. In this context, perhaps home improvements can be seen as an expenditure rather than an investment. If this is the case, then Jonas and Mimimi are holding on to far less of their income than we previously thought.
4- What have been the other major findings of the project so far?
One issue that South African policy makers are particularly concerned about is overindebtedness. However, although nearly all (95%) of the Financial Diaries households paid some form of debt every month, the majority of households are not what we would call highly indebted i.e. with debt service more than 20% of gross monthly income. Those households that are highly indebted (24% of the households) are very highly indebted indeed, with average monthly debt payments of 31% of monthly income. Highly indebted urban households pay more to formal financial credit (80% of payments), while rural indebted households pay more to informal credit (71% of payments).
We've also found that shocks and events are extremely critical in influencing the financial management of poor households. The most frequent financial event is an unexpected need to contribute to an out-of-household funeral; 81% of households had at least one of these situations during the 28 month period, while 47% had two or more. In rural areas, contributions to out-of-household funerals are lower but more frequent, on average 4 times during the last 28 months. Moreover, insurance instruments are rarely used to fund contributions for an out-of-household funeral; only 6% of the time.
Another area we've looked carefully at is survivalist business. Many of the survivalist businesses (48%) that we interviewed started and then stopped before the end of the study year. Most (63%) of the businesses are retail, which on average tend to make a smaller monthly profit than services or manufacturing. Ironically, we found that business owners are more providers of credit than recipients of credit! A key difficulty is managing cash flow - a clear credit strategy is important to keep businesses going.
One theme that came to us over and over is that you do not lose your "financial personality" as you move down the income curve. We often tend to either exalt or vilify low income households - either they are heroes for managing to save or spendthrifts that borrow too much. But, in reality, both prototypes are represented, just as they are within our own circle of friends and acquaintances.
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Suggested readings Ardener, Shirley and Sandra Burman, editors. 1995. Money-Go-Rounds: The Importance of Rotating Savings And Credit Associations For Women. Oxford, UK ; Washington, D.C.: BERG, 1995. Rutherford, Stuart. 2001. The Poor and their Money. United States: Oxford University Press. Ruthven, Orlanda and Kumar, Sushil (2002) "Fine-Grain Finance: Financial Choice & Strategy Among the Poor in Rural North India," Finance & Development Working Paper 57, IDPM, University of Manchester |